The world’s largest oil producers are inching closer to an unprecedented global deal to rescue the energy industry from collapse after the U.S. said production will drop dramatically. While the forecast reflects what President Donald Trump has called an “automatic” reduction by U.S. explorers, not a commitment from the world’s top producer, it helps pave the way for Saudi Arabia and Russia to coordinate output cuts at Thursday’s virtual OPEC+ meeting. On Friday, they’ll seek cooperation from other nations in a Group of 20 conference.
Their actions will determine whether the world continues to drown in a flood of oil that’s starting to overwhelm storage tanks and force a wave of abrupt production shutdowns at a time when the Covid-19 pandemic is destroying demand. Concerns that coordinated output cuts may not be enough to clear a global supply glut sent U.S. oil futures tumbling 9% on Tuesday, but failure to reach an agreement could plunge prices much lower.
A deal hinges on some form of cooperation with America, according to delegates involved in the talks. The production drop forecast by the U.S. government on Tuesday could be enough to satisfy Saudi Arabia and Russia. Trump said in an interview with Fox News on Tuesday night in the U.S. that he’s spoken to the Russian and Saudi leaders about the negotiations and that “it’s all going to work out.”
The U.S. Energy Information Administration slashed its oil output forecast by almost 10%, saying it now expects the nation to pump an average of 11.8 million barrels a day in 2020, and just over 11 million next year. The country is currently producing 13 million barrels a day. The production drop forecast by the U.S. government on Tuesday could be enough to satisfy Saudi Arabia and Russia.
The report demonstrates that there are already projected cuts of 2 million barrels a day, without any intervention from the federal government, an official at the Energy Department said.
“I think there is already an understanding between Saudi Arabia, Russia and the U.S.,” Ed Morse, head of global commodities at Citigroup Inc., said before the American production estimate was cut. “The U.S. is a party to the agreement, in effect, because the price of oil is already reducing drilling activity to an extent that production will likely be down 1 million barrels a day by the end of the third quarter.”